a. For this base-case scenario, what is the NPV of the plant to manufacture lightweight tractors? b. Based on input from the marketing department, Buhler is uncertain about its revenue forecast. In particular, management would like to examine the sensitivity of the NPV to the revenue assumptions. What is the NPV of this project if revenues are 10% higher than forecast? What is the NPV of this project if revenues are 10% lower than forecast?
a. For this base-case scenario, what is the NPV of the plant to manufacture lightweight tractors? b. Based on input from the marketing department, Buhler is uncertain about its revenue forecast. In particular, management would like to examine the sensitivity of the NPV to the revenue assumptions. What is the NPV of this project if revenues are 10% higher than forecast? What is the NPV of this project if revenues are 10% lower than forecast?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Buhler Industries is a farm implement manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight tractors. Buhler plans to use a cost of capital of 12 % to evaluate this project. Based on extensive research, it has prepared the following incomplete incremental free cash flow projections (in millions of dollars): The relevant CCA rate for the capital expenditures is 10%. Assume assets are never sold. a. For this base-case scenario, what is the NPV of the plant to manufacture lightweight tractors? b. Based on input from the marketing department, Buhler is uncertain about its revenue forecast . In particular, management would like to examine the sensitivity of the NPV to the revenue assumptions. What is the NPV of this project if revenues are 10 % higher than forecast? What is the NPV of this project if revenues are 10 % lower than forecast?
Transcribed Image Text:Buhler Industries is a farm implement manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight tractors. Buhler plans to use a cost of capital of 12% to
evaluate this project. Based on extensive research, it has prepared the following incomplete incremental free cash flow projections (in millions of dollars):
Free Cash Flow ($000,000s)
Revenues
- Marketing expenses
- CCA
= EBIT
Year 0 Years 1-9 Year 10
- Manufacturing expenses (other than depreciation)
96.00
-38.00
96.00
- 38.00
- 11.00
- 11.00
?
?
?
?
?
?
?
?
?
- 5.00
- 5.00
-146.00
10.00
- 146.00
?
- Taxes (35%)
= Unlevered net income
+ CCA
-Increases in net working capital
- Capital expenditures
+ Continuation value
= Free cash flow
The relevant CCA rate for the capital expenditures is 10%. Assume assets are never sold.
a. For this base-case scenario, what is the NPV of the plant to manufacture lightweight tractors?
b. Based on input from the marketing department, Buhler is uncertain about its revenue forecast. In particular, management would like to examine the sensitivity of the NPV to the revenue assumptions. What is
the NPV of this project if revenues are 10% higher than forecast? What is the NPV of this project if revenues are 10% lower than forecast?
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